Deal raises dilemmas for Foster’s directors

When SABMiller lobbed its $4.90-per-share offer for
Foster’s
on June 21, the first directors’ duty that popped into the heads of the members of the Foster’s board must have been to maximise value for shareholders. After all, wasn’t that what the demerger of Treasury Wine Estates had been designed to do?

Dealogic | Deal profile of Foster’s/SABMiller

The Goldman Sachs-advised Foster’s board would also have been told that to engage with its suitor too early would give its imprimatur to the initial price, making it harder to procure a bigger one down the track.

But, as they do, things moved on in the (exactly) three months since the deal was announced. For one, the S&P/ASX200 is down 11 per cent, making $4.90 look more generous that it initially did.

More intriguingly, no white knight arrived on any horse, or any other means of transport.

Despite advisers swarming around the likes of Molson Coors, Anheuser-Busch, InBev, Asahi, Modelo and Heineken, getting in those brewing giant’s ears and encouraging them to make bids of their own for Foster’s, no competition to SABMiller entered the ring. Perhaps they, too, feared Foster’s rejections. Or was it the maturity of the Aussie beer market and its relatively full valuations that were not to their taste?

Whatever the reason, the lack of an alternative bid changed the dynamic in the Foster’s boardroom.

Given its initial hostility, even as the finishing touches were being put on the scheme of arrangement and announcement of the revised deal late on Wednesday, Foster’s was preparing shareholder resolutions for its annual general meeting next month that would have breached defeating conditions attached to the SABMiller offer. It had also announced last month a $500 million capital return to its shareholders in an attempt to scuttle the deal.

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Despite such tactics being in motion, the changing market conditions and lack of a contested auction for the company meant the Foster’s board was duty-bound to reconsider its position.

And so, the deal was transformed into a friendly one.

This was not unprecedented. Some recent authority pointed towards the possibility of recouping a higher offer for shareholders following a decision to become a friendly target. The massive AMP/AXA deal started off as hostile before turning friendly, and ultimately being consummated. Similarly, Fletcher Building’s attempt to acquire Crane Group started off hostile, but switched to a friendly take­over in February when the Crane’s board recommended investors accept a revised offer. (And it was not until it secured support from Crane’s board that Fletcher saw momentum for acceptances for its bid.)

Whether value for Foster’s shareholders has been “maximised" is a subjective question; but it certainly has been increased over the three months.

SABMiller’s revised $5.5325-cash-per-share offer, which includes a 13.25¢ final dividend, is 13 per cent more than its original offer, and represents a premium of 24 per cent compared with the five-day volume weighted average price of Foster’s shares from the first day after the Treasury Wine Estates demerger.

And as Goldmans Sachs may have pointed out to Foster’s, given it acted for Cadbury on its defence against Kraft in the recent UK takeover battle, a 13 per cent increase was not to be scoffed at. Indeed, Cadbury forced Kraft improve its offer - by 14 per cent - which led to Cadbury shareholders accepting the deal.

The VWAP premium also looked more reasonable. According to a report on the key mergers and acquisition themes of the past 12 months published last week by Freehills, the median initial share price premium of takeover offers in FY2011 was 33 per cent of the target share price immediately before announcement.

It can be presumed that Foster’s directors were advised that given the 11 per cent drop in the ASX200 over the offer period, the new SABMiller was at a level that should be put to shareholders and that shareholders should be given the chance to vote on the offer.

Given the massive fees at stake if the deal completes, and because the reputations of the Foster’s directors are now intrinsically tied to the success of the deal, there will be a hive of activity in the coming weeks aimed at convincing Foster’s shareholders to back the scheme at a meeting later this year. To pass, 75 per cent of those shareholders present and voting at the meeting will need to give their thumbs up.

Among the advisers who will now be oiling the wheels for a Yes vote will be: Christian Johnston and Zac Fletcher, who did the heavy lifting for Foster’s at Goldman Sachs (which also advised Foster’s on the Southcorp transaction); and Bruce McLennan at Gresham Partners.